A Fortune Cookie for China’s Economy

It’s common today for people to look at the amazing economic progress of China and think that they’ve got something figured out that the rest of the world hasn’t. And what’s more, they’ve done it without liberalizing politically and have resisted any movement towards political liberalization such as many assumed would quickly follow their opening up their markets.

China’s rulers, like the Soviets before them, believe they have discovered something no one else has, that they can have a rapidly growing economy without the political freedoms of the West. They laugh at democracy and believe their system of basically economic fascism, centrally-controlled economies with limited and contingent property ownership, will outshine the West economically.

China’s been riding high on 7.5%+ yearly growth rates. Well, until this last quarter when that figure has begun slipping.

There’s an obvious historical parallel to this, in fact several of them, as noted in “Why Nations Fail,”–the most notable being Khrushchev’s Russia and his famous statement, “We will bury you!” — economically, he meant.

At the time Soviet Russia was growing rapidly, far faster than much of the world.

Russia grew rapidly even under the oppression of centralized dictatorship in part because there was so very much catching up to do, just in mechanizing a formerly agricultural state. But once diminishing returns set in, a lack of a free market prevented the kind of creative destruction that a free economy always experiences, that is painful but healthy. Instead, state-connected businesses with privileges and grants continue existing at the expense of the economy generally.

China is currently mired in this kind of privilege granting. You can’t do anything at the highest levels in Chinese business without explicit party consent. And China, too, has a lot of catching up to do economically.

Argentina experienced much the same thing in the late 19th century, 50 years of growth in the midst of political oppression, where standards of living in 1900 were on par or even superior to Londoners. But Argentina maxed out and has been failing ever since.

Now today the grand illusion of “it works” has appeared again in the form of China, but there’s no real reason to think that merely catching up economically with the rest of the world is necessarily going to lead to political change in China of the sort that liberalizes the country and breaks the control of the communist party.

For that matter, it could easily be argued that the USA itself has transformed its political and economic institutions into extractive ones that have significantly curtailed the ability of the market to engage in creative destruction and innovation compared to perhaps other places in the world.

The US used to be a place where you could try new things. Today all new things are contingent on government approval. 50 years ago they would’ve started drone companies without asking for permission. Today the FAA preemptively shuts them down.

I expect both the USA and China to eventually max out and stagnate, and neither to significantly liberalize any time soon. If we want out, we’re going to have to build a new place ourselves.

My prediction: once the low-hanging fruit of economic development in China is reaped, their economy will falter and stagnate and fail to meet productivity and wealth levels of most of the West. Not because of Western exceptionalism or anything like that, but precisely because of its centralization of political power, of which they are so proud of.

If I crack open China’s fortune cookie perhaps it might say something cheesy like, “Sunshine today, rain tomorrow”–and that’s likely more accurate than most of the cheap fortunes I’ve gotten.